This is the second in a series of posts on Initiative 1183, the latest liquor privatization initiative in Washington State. This post focuses on one of the wine-specific changes in the initiative, central warehousing.

See a previous post on Initiative 1183, with additional details about the initiative’s contents,here. See a post on another one of the initiative’s key components, volume discounting, here.

Central Warehousing

What It Means: At present, retailers and restaurants can either buy wine directly from a winery or they can buy from a distributor who provides the wine. If they do the former, they buy as much as they can put on their shelves. Retailers and restaurants are not allowed by law to store wine off-site, and most have limited on-site storage. In most cases, their storage is the retail shelf. If the retailer buys through a distributor, the distributor warehouses the wine and then brings it to the retail outlet as needed.Initiative 1183 would allow retailers and restaurants to have off-site, central warehousing. From this central warehouse, they could then distribute to local stores.

Why Costco Cares: The combination of volume discounting (see previous post here) and central warehousing give Costco and similar companies maximum leverage to determine price. Costco could purchase directly from a winery or from a distributor at large volumes and have the wine distributed from a central location to all of its area stores. This would be particularly appealing for ‘house brands,’ further lowering their cost.

Central warehousing would also give Costco additional leverage with distributors. Let’s say a distributor is not offering a volume discount suitable to Costco. Costco could go straight to the winery and negotiate terms or threaten to do so. Though unlikely to occur in most instances due to the damaging effect on winery, distributor, and retailer relations, 1183 would provide the option.

Why Some Are For/Against: Proponents of central warehousing say that it allows for increased efficiencies in the system. By being able to warehouse the wine, Costco would be able to buy in much larger quantities for all of its area stores. It would also be able to negotiate larger volume discounts.

Opponents say that central warehousing gives companies like Costco too much power and too much ability to dictate price. They also say that central warehousing is likely to lead to a consolidation of distributors and a decrease in SKUs on the retail shelf.

Some distributors see this aspect of 1183 as a direct threat to their business. Others believe Costco will continue to use distributors for most of their wines except when it makes sense not to.

What It Means for Consumers: There will most likely be several ramifications of central warehousing for consumers. On the one hand, Costco and others will be able to offer certain products to consumers at lower prices, particularly ‘house brands.’ On the other hand, this may lead to consolidation of distributors, potentially making it more difficult for some wineries to find distribution channels and making it less likely that consumers will see some wines on the shelves.

Some have expressed concern that central warehousing will lead to a decrease in consumer selection. The argument is as follows. At present companies like QFC purchase wine and the wine is stocked by distributors. This allows QFC to offer a wide range of brands, as they are only dealing with their floor inventory of a limited number of bottles.

However, if a company like QFC starts buying wine in larger quantities and storing the wine at a central warehouse, having a large selection of items in very small quantities makes less sense. This is especially true when there is an incentive to buy larger quantities. The number of wines represented on retail shelves may therefore decrease as the shelves absorb cases of wine from a central warehouse instead of bottles of wine.

Retailers could, of course, still work with distributors to stock the shelves by the bottle for smaller items. However, with spirits also presumably taking up retail space if 1183 passes and cases coming in from the central warehouse, there will presumably be fewer products on display.

Next up on Initiative 1183, a look at some of the initiatives other provisions.

CORRECTION: After publishing this post I received a message from Chuck Miller at Seattle Wine Storage who noted that retail stores and restaurants can currently store wine off-site with the permission of the Liquor Control Board. However, the wine currently must be delivered to their licensed location first; it can't be delivered directly to their central warehouse. I'll look for some additional information regarding how many companies currently have gained permission to do some from the LCB.

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Sean, your article raises interesting questions for us wine storage businesses: will 1183 make it easier for restaurants to store excess inventory at offsite wine storage businesses such as ours. As for the current exemption, my understanding of the wrinkle whereby restaurants are permitted to store wine off-site is that the restaurant must carry a catering "rider" to their license from the WSLCB, which allows the restaurant to keep wine in a location other than the restaurant's physical address.

Patrick G, my reading of Initiative 1183 is that it should make it easier for restaurants to store wine with you. One way in which it would do this is by allowing wineries and distributors to potentially send wine directly to you which is an added convenience.